When to consider tapping into your investments for major life events
No matter how well you manage your money, life is full of big financial moments — both planned and unexpected. Ideally, you fall back on your savings to cover the expenses, but if you ever need to withdraw from your investment accounts, whether it’s for a big ticket purchase, like a down payment for a house, or due to an emergency, such as a major car repair, you might want to take these factors into account before you dip into those invested funds.
We asked Ally Invest Senior Financial Advisor Dimitri Pan for his insights on tapping into investments.
Read more: Take our quiz to find out which investment accounts are right for you
When to use the funds in your taxable brokerage account
While you might typically keep your investments in the market for the long haul, perhaps you’ve experienced an unanticipated costly medical expense or you have a major purchase planned, such as buying a car. If you’re in a situation where you must turn to your investment accounts for extra funds beyond your liquid savings, you may want to consider tapping any stocks, bonds, mutual funds or exchange-traded funds (ETFs) in your brokerage account before turning to retirement funds. In other words, these are investments held in accounts that won't charge penalties if you make a withdrawal (though you may owe capital gains tax, if you sell and make a profit) — unlike an Individual Retirement Account (IRA) or 401(k).
When selling securities, you might also want to consider if it makes more sense to sell those that will incur long-term capital gains (which are generally taxed at a lower rate than the federal income tax rates) before those that incur short-term capital gains (which are generally taxed at federal income tax rates). Otherwise, you could not only be facing a large, planned expense, but a significant, unplanned tax bill as well. A tax professional can help you determine the tax implications as you consider different actions.
Read more: 5 tips when planning for taxes on your investments
When you start investing, keep your timeline and risk tolerance in mind. Both will help guide you on how to invest your money — and later on, these factors can also help determine which investments to sell and when. An Ally Invest Robo Portfolio allows you to set your risk tolerance and can simplify diversification by creating a portfolio that includes a blend of assets like stocks, bonds and real estate. Plus, you can choose to have a cash buffer that gives you some extra padding, if you ever need it. If you're feeling confident making moves in the market, you might further diversify with bonds, mutual funds and individual stocks through Ally Invest Self-Directed Trading.
When to use your tax-advantaged retirement account investments
When life throws a major curveball at you, you might find yourself looking at your IRA or 401(k) investments for fast cash. In general, it’s not considered a good practice to use those funds, even if it feels like the only alternative. These accounts are built with long-term investing in mind (i.e. for retirement), and you can incur penalties if you withdraw early — plus, you don’t want to get to retirement and find you don’t have as much as you thought you did.
Here are a few factors to note, if you do find yourself turning to retirement funds: Many 401(k) plans allow you to take out a loan against your account balance or you might qualify for a hardship distribution, which allows you to withdraw funds penalty-free for what the IRS describes as “an immediate and heavy financial need.” Be sure you understand the IRA withdrawal rules or 401(k) loan terms before you take this step and consider consulting with a tax professional or financial advisor to help you work through the situation — they may be able to help you find other methods that won’t incur penalties or compromise your funds for the future.
The value of a financial advisor
Even when life goes according to plan, knowing what investments to sell and when can be confusing. Working with a financial advisor, like those with Ally Invest Personal Advice, can help you weigh several important factors, including account types and their characteristics.
If you’re considering tapping your investments, a financial advisor can help you identify different choices, point out the advantages, disadvantages and trade-offs of each. For instance, an advisor can help you identify when it makes sense to pay higher short-term capital gains instead of lower, long-term capital gains. And when it comes to financial planning, a financial advisor knows it’s important to prepare for both the expected and unexpected. Maybe you need help establishing your approach, or perhaps it’s already in place — either way, a financial advisor can help keep your plan on track.
Expect the unexpected
No matter where life takes you, the journey will have twists and turns that you don't expect. Your ideal scenario might not include using your investments to get through an unexpected life change, but it’s important to know you have that choice should you encounter a bump in the road, anticipated or not.
